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Principles of Economics- Mankiw (5th) 310

Principles of Economics- Mankiw (5th) 310 - is to consider...

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320 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS Now that we know how monopolies arise, we can consider how a monopoly firm decides how much of its product to make and what price to charge for it. The analysis of monopoly behavior in this section is the starting point for evaluating whether monopolies are desirable and what policies the government might pursue in monopoly markets. MONOPOLY VERSUS COMPETITION The key difference between a competitive firm and a monopoly is the monopoly’s ability to influence the price of its output. A competitive firm is small relative to the market in which it operates and, therefore, takes the price of its output as given by market conditions. By contrast, because a monopoly is the sole producer in its market, it can alter the price of its good by adjusting the quantity it supplies to the market. One way to view this difference between a competitive firm and a monopoly
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Unformatted text preview: is to consider the demand curve that each firm faces. When we analyzed profit maximization by competitive firms in Chapter 14, we drew the market price as a horizontal line. Because a competitive firm can sell as much or as little as it wants at this price, the competitive firm faces a horizontal demand curve, as in panel (a) of Figure 15-2. In effect, because the competitive firm sells a product with many Quantity of Output Demand (a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve Price Quantity of Output Price Demand Figure 15-2 D EMAND C URVES FOR C OMPETITIVE AND M ONOPOLY F IRMS . Because competitive firms are price takers, they in effect face horizontal demand curves, as in panel (a). Because a monopoly firm is the sole producer in its market, it faces the downward-sloping market demand curve, as in panel (b). As a result, the monopoly has to accept a lower price if it wants to sell more output....
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